Opinion
No. 96-2441
March 11, 1997
MEMORANDUM
Upon an adversary claim hearing, the Bankruptcy Court entered judgment in favor of appellee Oxford Financial Corp. and against appellant debtor, Ferguson Flynn Enterprises, Inc. acting through the Official Committee of Unsecured Creditors. Order, Adversary No. 93-2309 (Bankr.E.D.Pa., Feb. 16, 1996). Jurisdiction is 28 U.S.C. § 158(a).
On November 18, 1991, debtor Ferguson Flynn Enterprises, Inc. transferred $100,000 to appellee Oxford Financial Corporation. On December 16, 1991, debtor filed a voluntary petition under Chapter 11 of the bankruptcy code. Thereafter, debtor sued appellee, claiming the $100,000 was a preferential payment under 11 U.S.C. § 547.
The Bankruptcy Court found that the $100,000 represented the return of down money under a real estate agreement of sale; and that the transfer was unavoidable under the ordinary course exception of § 547(c) and under the § 547(c)(1) new value exclusion. On appeal, the Bankruptcy Court's fact findings, such as the agreement of sale, may not be set aside unless clearly erroneous; the avoidability exception/exclusion, as conclusions of law, are subject to plenary review. Chemetron Corp. v. Jones, 72 F.3d 341, 345 (3d Cir. 1995).
The insubstantial evidence presented at the adversary hearing depicted, at best, a bizarre real estate transaction. On August 15, 1991, "Frances J. Flynn et al." as seller entered into a standard form agreement of sale with Oxford Financial to convey six unimproved building lots in Chester County. The purchase price was $500,000 and the down money $100,000. The agreement required seller to obtain "sewage permits" for each parcel by October 15, 1991 and fixed settlement for on or before November 1, 1991. It provided: "Failure to provide Buyer with sewage permits shall render this Agreement Null and Void."
Mr. Flynn testified that the use of "et al." was because it was not known if the lots were owned in his or his company's name.
Paragraph 9 of the agreement of sale stated that:
Deposits, regardless of the form of payment and the person designated as payee, shall be paid to Agent for Seller who shall retain them in an escrow account until consummation or termination of this Agreement in conformity with applicable laws and regulations.
However, the $100,000 was not placed in an agent's escrow account. No agent appears to have been involved. Instead, it was immediately deposited into debtor's regular operating account with a handwritten notation on the deposit ticket, "FJF Capital," which designated Mr. Flynn's capital contribution account. Thereafter, the proceeds were used by debtor, and Oxford Financial was not shown on the company's monthly list of purchasers' deposits. Debtor, which at the time was in difficult financial circumstances, was in the business of building and marketing large housing developments. Its cash flow came from real estate settlements and construction payments by banks.
Frances J. Flynn, who was debtor's chief operating officer, testified that the deposit of the $100,000 in the operating account was an error, as was the notation on the deposit ticket. He stated that the purpose of the agreement of sale was to sell the lots to Oxford Financial. However, it is unclear whether any steps were taken to obtain the permits, and no circumstances surrounding the sale agreement or attempts to perform it were offered into evidence. According to Mr. Flynn, he had dealt with an individual at Oxford Financial for 15 to 20 years buying and selling ground and borrowing money. Nevertheless, he could not identify any other real estate transaction. He was not asked to explain why the down money was 20 percent of the purchase price or why the $100,000 was not returned until 34 days after the agreement of sale, by its terms, became null and void. When the money was repaid, debtor was insolvent.
As transcribed, Mr. Flynn's testimony was that the reason the permits were not obtained was "the ground would perk." Tr. at 32. This may have been a transcription error for "the ground would not perk" i.e., would not pass an absorption test required by local health departments. If so, it is another unexplained circumstance. Developers of raw ground usually have a good idea whether on-site sewage disposal is feasible at their property. See Act of Jan. 24, 1966, P.L. (1965) 1535 No. 537, § 9, as amended, 35 P.S. § 750.9, directing Environmental Quality Board to promulgate standards for percolation tests.
In Pennsylvania, the general rule is that the earnest or down money, as liquidated damages, should not exceed 10 percent of the purchase price. Berwick v. Daniel W. Keuler Realtors, Inc., 407 Pa. Super. 528, 536 n. 1, 595 A.2d 1272, 1266 n. 1 (1991). See Ellis v. Roberts, 98 Pa. Super. 49, 60 (1929) (retention of 15 percent of the price was excessive and unenforceable as attempt to compel specific performance).
The corporate secretary of Oxford Financial testified to having signed the agreement and identified a photocopy of the agreement of sale and her signature. No evidence was given as to the nature of Oxford Financial's business or its reasons for entering into the agreement of sale. No explanation was offered why Oxford would permit the down money to be paid directly to debtor — particularly given debtor's precarious financial condition — or why it would not insist on proof of an escrow deposit. No witness, including Mr. Flynn, appeared to have much personal, first-hand knowledge of the transaction.
The original of the agreement of sale, according to this witness and Mr. Flynn, could not be located. Over objection, the copy of the agreement was received. F.R.E. 1002-1004.
Under § 547(c), the burden of proof was on appellee to show the bona fides of the agreement of sale and enough of the specific characteristics to substantiate the transaction. See 11 U.S.C. § 547(g). Appellant contends that the transaction was a loan and not an agreement of sale. The evidence strongly suggests that while the parties may have entered into an agreement of sale, it was either as security for the advance of the $100,000 or as a mechanism to obtain its return. To the extent that the Bankruptcy Court found the agreement of sale to have been an arm's length real estate transaction, that finding will be set aside as clearly erroneous. Once the $100,000 loses the characterization of down money, its repayment is avoidable as a preference.
An obvious explanation that is consistent with both the agreement of sale and debtor's account documentation is that Mr. Flynn as recipient of the $100,000 contributed or lent it to debtor through his capital account. The effect of such an arrangement is unclear, and appellee made no effort to delineate it.
The sustaining of the ordinary course exception and the new value exclusion also are highly questionable rulings. Positing a bona fide agreement of sale, as was determined by the Bankruptcy Court, there is little evidence that it occurred in the ordinary course of the parties' businesses and according to ordinary business terms — as defined in § 547(c)(2). As to the new value exception, when the agreement became null and void as of October 15, 1991, appellant's equitable title was immediately extinguished. Moreover, the seller had never given up possession of the properties, and the agreement of sale had not been recorded. See McCarmon v. Marston, 679 F.2d 13 (3d Cir. 1982) (constructive notice of agreement of sale from equitable owner's possession under unrecorded sale agreement barred otherwise applicable strong-arm provisions of § 544(a)(3)). Factually and legally, the new value exclusion does not appear to fit the avoidability circumstances of this case.
ORDER
AND NOW, this 10th day of March, 1997, the Bankruptcy Court's order dated February 16, 1996 is reversed. Judgment is entered in favor of appellant debtor Ferguson Flynn Enterprises and against appellee, Oxford Financial Corp. See Memorandum entered this date.